The monsoon effect
Inadequate monsoon has led to rise in residential rentals as mitigation of supply constraints is compromised in the short term....
The annual monsoon has always been perceived both as a rural blessing and an urban curse they are good news for the agrarian sector and the bane of water-logging prone cities. However,this caricatured mindset is breaking. After the swine flu epidemic,the next threat looming both over villages and cities of two-thirds of the nations districts is a drought-like situation. Cities and towns are reeling under water shortages that threaten to get worse,and the economies of agrarian rural areas are held hostage.
These adverse effects of a failed monsoon are self-evident – what is less obvious is the impact it can and probably will have on the already compromised real estate sector. After all,the fate of Indias property markets is not directly linked to the availability of water or rainfall.
It is important to understand that the health of the real estate market is directly connected to the nations larger economic framework. Therefore,it is subject to any changes in the macro environment. Agriculture contributes to only about 18 per cent of Indias GDP. However,almost 50 per cent of our population directly or indirectly depends on this sector,which is by far the largest employer in India. Expert analytical bodies such as ASSOCHAM have estimated the impact of a drought on the economy – according to them,Indias GDP growth will be less than 6 per cent for the year 2009-10.
India has been battling hard to get back onto an 8-9 per cent GDP growth rate since the global financial meltdown reared its malevolent head back in 2008. This new forecast is not geared towards improving the macro-economic situation to which market sentiments are inextricably linked despite the fact that the world seems to be inching past the worst phase of economic crisis.
The impact of a failed or inadequate monsoon is multifold. First,a vast segment of marginal farmers are rendered jobless and tend to migrate to urban areas for subsistence. These migrations add to the burden of already strained civic infrastructure of these cities. Shelter becomes a critical issue for such migrants,and many of them flock to the city slums as they cannot afford anything on the formal real estate market. The rentals for residential space tend to move upwards as mitigation of supply constraints is compromised in the short term. Nevertheless,capital values will not gain significantly – owing largely to currently reduced disposition for owning real estate asset,and the high interest costs.
Inflationary pressures cause retail spends to dip and the prices of commodities to move upward,leaving consumers with little money to spend on capital goods – including housing. Retailers curtail their expansion plans due to lowered revenue growth perceptions,affecting the retail real estate sector to feel the heat. Similar effects will be seen on the leisure and entertainment sector a not inconsiderable consumer of real estate.
This grim phase may benefit the services sector and its contribution to the commercial real estate sector. Global economic recovery is picking up,and international demand has started showing sign of revival. This will result in improved export performances of Indias 200 SEZs. This sends out a clear message – a turnaround for the commercial real estate sector can only take place by hand-holding the services sector.
That said,a perspective of a failed monsoons impact on the economy and therefore,by derivation,on the real estate market,would be incomplete if one did not touch upon a hard fact of life. In the past,we have seen instances of distress sale of land by farmers in times of adversity. Many investors and intermediateries take the advantage of such situations to quietly built land banks. The resulting supply of land tends to lower the land prices for urban needs. Nature-related setbacks such as insufficient monsoons also result in farmers softening their stand against a proposed land acquisition by public or private entities,with many of them making significant compromises. Hard as it may be to digest,the fact remains that such adversities often add new momentum to infrastructure projects that were deadlocked because of land acquisition issues. l
The writer is AVP strategic consulting,JLLM
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